Electricity market reform proposals advocated by a trade group representing municipally owned utilities would not lower power prices and would stymie investment critically necessary to keep electricity supplies reliable, according to a new report, Electricity Market Reform: APPA’s Journey Down the Wrong Path, by William W. Hogan and John Chandley, experts in electricity markets and regulation with LECG.

The LECG study analyses the multiple and evolving electricity market reform proposals put forward by the American Public Power Association (APPA) and clearly shows that APPA’s proposed changes in regional organized wholesale power markets are at odds with experience and reflect fundamental misunderstandings of how regional transmission organizations (RTOs) and organized regional electricity markets work.

“Various critics, including the APPA, propose major changes to RTO markets, but their reforms move in the wrong direction,” observed Hogan, Raymond Plank Professor of Global Energy Policy at Harvard University. “The critics do not acknowledge the special characteristics of electricity that underpin these markets or the experience that led to the current designs. And they ignore evidence that shows substantial benefits from RTO markets.

“Proposals to unravel the prevailing RTO market model threaten the investment required to maintain system reliability and promise to complicate the ability of independent market monitors to police against anticompetitive behavior and potential manipulation,” Hogan added.

“APPA’s proposals to reform RTO markets have changed, but they center on restricting access to spot markets while forcing suppliers into contracts more favorable to buyers. These efforts tend to resurrect flawed approaches already considered and rejected, or tried and failed,” observed Chandley. “Our study examined the evolution of electricity markets in various regions of the country and found various reforms embraced by APPA have been tried and discarded in the past,” Chandley explained.

“At issue in this debate is the long-run reliability of the nation’s electricity supply. The frameworks proposed by APPA would eliminate one set of revenues necessary to support investment in generation facilities required to maintain a reliable electricity system,” warned Chandley.

Hogan and Chandley’s analysis focuses on two of APPA’s proposals in particular: Competitive Market Plan (February 2009), which offers a version of its evolving proposals to restructure organized electricity markets, and Consumers in Peril (February 2008), which alleged that RTO markets cause high prices and do not lead to sufficient investments in new generation and transmission.

The LECG analysis of these evolving proposals shows that the changes APPA advocates would have various adverse impacts and undermine the existing pricing mechanisms in organized competitive wholesale markets, including:

1) Limit access to grid services essential to accommodate new market entrants;
2) Reduce grid usage and result in less economic trading between regions, leading to higher costs for consumers;
3) Create potential investment shortages for new generation resulting in long-term reliability problems; and
4) Restrict RTO services that encourage deployment of demand response and renewable energy resources and that accommodate retail choice.

APPA’s proposals also cite alleged problems with long-term contracts in RTO markets. “APPA’s complaint is not that bilateral contracts aren’t possible – they are fully accommodated by today’s RTOs – but rather that suppliers won’t agree to terms APPA’s members prefer. APPA claims this is because suppliers can always sell into RTO spot markets, and that spot prices are inflated. But RTO Market Monitors have periodically evaluated and rejected these claims and FERC has agreed,” concluded Chandley. “Rather than being evidence of failure of the market design the connection between contracts and spot markets is a sign that the RTO markets are functioning as designed.”

COMPETE Counsel and former FERC Commissioner William Massey commended the report. "Our nation is at a critical juncture where we must embrace electricity competition and well structured markets to promote the innovation, investment and demand resources needed to meet the economic and environmental challenges of the 21st Century. The LECG analysis is further evidence that APPA's proposals would take a step backward toward the failed monopoly regulatory mistakes of the last century. APPA’s proposals would suppress critically needed investment, thwart innovation and renewable energy development, and compromise reliability,” concluded Massey.